Incentives and limits in letters of intent: are they worth the paper they’re written on?

The purpose of this paper is to review the extensive case law in England and Wales on contractually binding letters of intent. The research focused on discovering whether the limits commonly found in binding letters of intent were upheld by the courts and so were effective in practice. It also reviews whether these limits are, as presumed by drafters, sufficient to act as incentives to the parties to conclude the full contract. The paper uses case law to analyse and evaluate the legal and business efficacy of these limits and incentives. It considers the rationale for such limits and incentives before drawing its conclusions and making recommendations.

The paper draws on cases in England and Wales to analyse the judicial interpretation of binding letters of intent. The author has adopted a black letter approach to this subject by focusing almost exclusively on primary sources. As there is no relevant legislation in England and Wales, the primary sources are case law. A limited literature review was adopted, as there is little commentary on this aspect of letters of intent and to ensure the paper’s originality. The paper also considers papers published by the Society for Construction Law.

The paper demonstrates that even if the drafting of the letter of intent is clear, it is the conduct of the parties after a letter of intent which prevents the stated limits on work times or cost applying, and undermines these limits in their roles as incentives intended to persuade the parties to conclude the full contract for the project. The terms of the letter of intent are easily ousted and may not be strictly enforced by the courts when a dispute arises.

The paper concludes with recommendations for ensuring the terms of the commonly used letters of intent provide more effective limits on the liability for the employer while giving the constructor the incentive to continue negotiating and concluding a formal contract for the works. The paper also recommends changes to the guidance to be given to users of standard form letters of intent to improve their efficacy as limited contracts.

The analysis of the cases is instructive and the recommendations provide valuable pointers for those who draft, review or agree letters of intent. The issues that are dealt with relate to how the parties can be incentivised through clear drafting to execute a more comprehensive contract for the project.